Lord McNally said customers were being "misled" into pursuing claims through companies, which they could deal with themselves for free. And he warned at Lords question time that the Government may need to take further action to deal with "abuses" in this area.

Labour's Lord Kennedy of Southwark said the mis-selling of PPI was a "scandal" but making a claim for compensation was "relatively straightforward" and people did not need to use claims management companies.

He said losing 30% of the compensation in fees and charges was "not very good value for money" and asked to meet the minister with consumer representatives to discuss how people could keep more of their money.

Know your rights

Lord McNally said he was happy to do this. Consumers had not been "best served" in this area and often were not aware that there were simpler ways of reclaiming the money than paying "exorbitant" fees to claims management companies.

Liberal Democrat Baroness Kramer asked if ministers were aware of allegations that companies were pursuing claims where the "product in question was never sold" and urged the Government to stem this "growing practice".

Lord McNally said this was "another example of abuse" and assured peers that where such practices were brought to the attention of the Ministry of Justice the firms responsible could be struck off the list of companies able to offer these services.

Baroness Sherlock (Lab) said banks had set aside about £9 billion for PPI claims and about £2 billion of this could go to claims management companies rather than directly to customers. She said the companies should be required to declare "up front" what their fees were and customers should be told they were not required to use them and could do it themselves for free.

Lord McNally told her: "Those are exactly the regulations that pertain to these companies. But there is no doubt because of the pressure of sales that people are being misled in this way.

"I think we will need to take further action. It doesn't need a pocket calculator to realise these companies are in an area where they can make a lot of money which should properly go into consumers' pockets."